Outcome based Service Delivery Model
What would it look like when a Loyalty Service provider gets paid based on % increase in business outcomes like Customer retention and NPS?
Imagine a world where we pay and get paid for end outcomes and not the means to achieve it.
But historically service providers have been charging for services like number of headcounts, effort (in hours/days) or a project (in fixed cost model) but with changing times this whole model has evolved (rather still evolving) and it is slowly becoming more common to charge the outcome.
In an IT Production Support the charging model in case of output based would be based on number of tickets fixed rather than on number of resources of time (hours/days) invested.
Time-and-materials contracts remain the most common outsourcing model in the industry, particularly offshore. The issue with traditional outsourcing models is that the focus is on input rather than output.
For example — In a private hospital, Doctors get incentives for prescribing patients with medicines & tests and procedures but not for healthy patients.
All outcome based model will have the following fundamental characteristics:
- Business outcome benefiting Customer rather than activities and tasks of service provider.
- Innovation in process to achieve the outcome — like automation.
- Use of quantifiable performance standards which are part of agreed outcome.
Rewards, Penalty and risks are included in Pricing and Procurement model.
These characteristics or traits of an outcome based contract are actually interdependent — Business outcome has to benefit the end user which is pre-agreed, Service provider nurtures innovation to achieve the same, these outcomes should be measurable against agreed outcome and ultimately based on performance the fee is paid.
Let’s looks at a very classic case study of the usage of Outcome based model in Airline industry. This is one of the best examples of adoption and operationalizing outcome based model probably much before we started talking about it in IT industry.
So it is something that is really creating a win-win situation for both service providers and the end business.
Hurdles to Adoption of Outcome based model
The adoption is like the long winding staircase which seems to have no end state. Despite the benefits to both service provider and customer, the outcome based model is still not prevalent. Two basic reasons are quantification and agreement on Outcome by both Service provider and Customer. And the other reason is the mind set or cultural shift that is needed from both parties.
Challenges in definition (qualification & quantification)
Definition of desired Outcome — “Outcome” itself is understood differently by Customers at different levels.
- For a CEO — revenue generated and operational ease might be an Outcome.
- For a CMO — insights and change into Customer’s motivations, intentions and behaviors might be an outcome.
- For a Product/Project Manager — quality metrics, number of tickets resolved, number of CR’s developed might be an Outcome.
Unlike traditional model, Outcome based model does not detail operational or technical specifications or tasks of individuals. Rather defines business outcome. Balance needs to be maintained where Customer is able to define Outcome appropriately which is measureable and is acceptable to service provider. And high level of risk understanding needs to be specified as Service provider will resist from taking on the Customer Business risks as part of outcome.
Quantification of Outcome should be measurable, clear, realistic and achievable. And the metrics which is used to measure the outcome should also be clear, achievable and agreeable.
If the Outcome cannot be measured than performance cannot be assessed and managed and a lot of disputes and dissatisfaction is inevitable between Service provider and the Customer.
